Sunday, May 6, 2018

FYI: 7th Cir Holds RESPA's QWR Provisions Require Actual Damages Caused by the Violation

The U.S. Court of Appeals for the Seventh Circuit recently affirmed a trial court's finding that a servicer did not violate the federal Real Estate Settlement Procedures Act ("RESPA") because the borrower could not prove that the servicer's failure to respond to a "Qualified Written Request" ("QWR") caused her actual damages, as required by 12 U.S.C. § 2605(f)(1)(A).


A copy of the opinion is available at:  Link to Opinion


In 2004, a borrower ("Borrower") bought a home with the help of a mortgage loan.  Borrower lived in the home with her ex-husband, their children, and her parents. In June 2013, Borrower moved out of the home and stopped paying the loan. By May 2014 the house was unoccupied. Thieves vandalized the unoccupied home. In 2014 Borrower remarried and then subsequently divorced her new husband.


In March 2014, the Servicer initiated foreclosure proceedings. The foreclosure court entered a default judgment and later vacated it in June 2015 at Borrower's request.


The 2014 theft produced insurance money.  The servicer of the mortgage loan ("Servicer") held the insurance proceeds in escrow pursuant to the mortgage. The Borrower hired a contractor to repair the home.


In October 2014 Borrower saw a property-preservation company that she did not hire remove items from the home.  The Borrower took no action regarding this incident.


In 2015, the Servicer disbursed $10,000 from the insurance proceeds to pay for the repairs. In April 2015 the contractor abandoned the job.  The contractor feared that the Borrower would not pay for all the work.  In the spring of 2015 vandals twice more damaged the house and in June 2015 a storm damaged the roof. Borrower did not hire a new repair contractor or ask the Servicer to disburse additional insurance funds. 


In July 2015 the City of Indianapolis notified Borrower that the home was a nuisance and demanded that she secure and repair the home to code.  Borrower spent about $5,000 responding to the City's demands. In August 2015, Borrower began getting treatment for depression and anxiety.


Subsequently, on September 5, 2015 Borrower sent a letter to the Servicer inquiring about the status of the loan and the insurance proceeds.  On September 25, 2015, the Servicer responded to the letter.  Borrower claimed that she did not receive the Servicer's response and filed suit alleged that the Servicer violated RESPA.  Borrower claimed that the Servicer's failure to respond caused her economic and emotional distress damages.


The trial court treated the letter as a "Qualified Written Request", 12 U.S.C. § 2605(e)(1)(B), and assumed that the Servicer must ensure that the Borrower receives its response.


The trial court nevertheless entered judgment in favor of the Servicer and against the Borrower because she could not prove actual damages, as required by 12 U.S.C. s2605(f)(1)(A). Specifically, the trial court concluded that not receiving the Servicer's response did not cause or aggravate any of Borrower's claimed damages. This appeal followed.


On appeal, the Seventh Circuit observed that RESPA "requires a servicer to correct errors in its records (s2605(e)(2)(A)) or provide appropriate information if no error needs fixing (s2605(e)(2)(B), (C))."  The Seventh Circuit also noted that RESPA requires a "servicer to refrain, for 60 days, from taking steps that would jeopardize the borrower's credit rating." 12 U.S.C. s2605(e)(3).  However, the Borrower did not allege that the Servicer damaged her credit rating.  Instead, the Borrower claimed that the Servicer's failure to respond to her QWR caused her emotional distress and broke up her marriage.


The Seventh Circuit noted that the trial court's assumption that the servicer must ensure that the borrower receives its response "is questionable given 12 C.F.R. § 1024.11, which says that mailing a timely and properly addressed response satisfies the Act whether or not the response is received. (The statute is silent on this issue.)"


Regardless, even if the Servicer were required to ensure deliver of its response, the Seventh Circuit found that the Borrower could not demonstrate how earlier access to the Servicer's description of her account would have helped her or how the Servicer's "lack of an adequate response, as opposed to the ongoing foreclosure and need of money for repairs, could have contributed to her mental issues."


Further, the Seventh Circuit held, the alleged breakdown of the Borrower's marriage was "outside the scope of" RESPA.  Perron v. J.P. Morgan Chase Servicer, N.A., 845 F.3d 852, 858 (7th Cir. 2017) ("the breakdown of a marriage is not the type of harm that faithful performance of RESPA duties avoids").


Moreover, the Seventh Circuit recognized that only the Borrower's divorce from her second husband occurred after the Servicer failed to respond to her QWR.  However, the events that caused the divorce predated the Borrower's letter to the Servicer.  As such, the Court held, the Servicer's alleged lack of a response to the Borrower's QWR did not proximately cause the Borrower's divorce.


The Borrower argued that the Servicer's alleged failure to respond to her QWR "aggravated her problems." Specifically, the Borrower claimed she "began to feel more anxious and depressed as [she] watched [her] home continue [to] deteriorate."  However, the Seventh Circuit noted, although the lack of insurance proceeds disbursed may have caused these alleged problems if the Borrower could not afford to repair the home, the Servicer's failure to respond to the QWR did not cause this situation because RESPA "does not require a servicer to pay money in response to a written request."


Finally, the Seventh Circuit observed that focusing on federal rules can distract lawyers "from the more mundane doctrines of state law that may offer greater prospect of success."  Here, the contract between Borrower and the Servicer governed how the Servicer must handle and disburse insurance proceeds. RESPA, in contrast, "does not require servicers to explain the details of contracts (or contract law) to customers or their lawyers." State contract law also controlled the deal between Borrower and the repair contractor, including any available remedy. The Court noted that State law doctrines like conversion, replevin, and trespass also may have provided relief against the property preservation company.


Here, the Seventh Circuit held that the trial court properly determined that the Borrower's sole claim that the Servicer failed to properly respond to her QWR failed for lack of damages.  The Seventh Circuit therefore affirmed the trial court's ruling.




Ralph T. Wutscher
Maurice Wutscher LLP
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